Management Accounting Solved Question Papers 2016 [Gauhati University Solved Papers BCOM 5th SEM]

Management Accounting Solved Question Papers 2016
[Gauhati University Solved Papers BCOM 5th SEM]

Full Marks: 80
Time Allowed: 3 hours
Answer either in English or Assamese

The figures in the margin indicate full marks for the questions

1. (a) State whether the following statements are True or False: 1x5=5

1) Management accounting anticipates future events.

Ans: True. It analyses past events and anticipate future events.

2) Profit-volume ratio is also known as contribution ratio.

Ans: True

3) Standard costing and budgetary control are similar in nature.

Ans: False

4) A flexible budget is also known as variable budget.

Ans: True

5) Material usage variance is the same as material quantity variance.

Ans: True

(b) Fill in the blanks with appropriate words: 1x5=5

1) Management accounting provides all possible information required for _____ purposes.

Ans: Managerial

2) Prime cost plus variable overhead is known as _____ cost.

Ans: Prime cost

3) All functional budgets are integrated to form a _____ budget.

Ans: Master Budget

4) Idle time variance is always _____.

Ans: Adverse

5) Budgetary control emphasizes on controlling of cost, while standard costing emphasises on achieving of _____.

Ans: Cost control and cost reduction

(c) Write in brief on the following in about 50 words each: 2x5=10

1) Scope of Management Accounting.

Ans: Scope of Management Accounting: The field of management accounting is very wide. The main purpose of management accounting is to provide information to the management to perform its functions of planning directing and controlling. Management accounting includes various areas of specialization to render effective service to the management. It includes Financial Accounting, Cost Accounting, Budgeting and Forecasting, Inventory Control, Statistical Analysis, Analysis of Data, Internal Audit, Tax Accounting, Methods and Procedures.

2) Advantages of Marginal Costing.

Ans: Advantages of Marginal Costing

a) Simple and Easy: It is very simple to understand and easy to operate.

b) Helpful in Cost control: Marginal costing divides total cost into fixed and variable cost. Marginal costing by concentrating all efforts on the variable costs can control total cost.

c) Profit Planning: It helps in short-term profit planning by making a study of relationship between cost, volume and Profits, both in terms of quantity and graphs.

3) Meaning of Budgetary Control.

Ans: Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.

4) Limitations of Standard Costing.

Ans: Limitations of Standard Costing:

a. Variation in price: One of the chief problems faced in the operation of the standard costing system is the precise estimation of likely prices or rate to be paid.

b. Varying levels of output: If the standard level of output set for pre-determination of standard costs is not achieved, the standard costs are said to be not realised.

c. Changing standard of technology: In case of industries that have frequent technological changes affecting the conditions of production, standard costing may not be suitable.

5) Two points of distinction between Fixed Budget and Flexible Budget.

Ans: Difference between Fixed Budget and Flexible Budget

	Fixed Budget	Flexible Budget
1.	It does not change with actual volume of activity achieved. Thus it is known as rigid or inflexible budget.	It can be recasted on the basis of activity level to be achieved. Thus it is not rigid.
2.	It operates on one level of activity and under one set of conditions. It assumes that there will be no change in the prevailing conditions, which is unrealistic.	It consists of various budgets for different levels of activity.

2. Write short notes on any four of the following: 5x4=20

a) Five points of differences between Financial Accounting and Management Accounting.

Ans: Difference between Financial Accounting and Management Accounting

The accounting system concerned only with the financial state of affairs and financial results of operations is known as Financial Accounting. It is the original form of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet, show them the manner in which operations of the business have been conducted during a specified period.

Management accounting makes use of the cost accounting concepts, techniques and data. The functions of cost accounting and management accounting are complimentary. In cost accounting the emphasis is on cost determination while management accounting considers both the cost and revenue. Though it appears that there is overlapping of areas between cost and management accounting, the following are the differences between the two systems.

Basis	Financial accounting	Management accounting
a) Objectives	The main objective of financial accounting is to supply information in the form of profit and loss account and balance sheet to outside parties like shareholders, creditors, government etc.	The main objective of management accounting is to provide information for the internal use of management.
b) Performance	Financial accounting is concerned with the overall performance of the business.	Management accounting is concerned with the departments or divisions. It report about the performance and profitability of each of them.
c) Data	Financial accounting is mainly concerned with the recording of past events.	Management accounting is concerned with future plans and policies.
d) Nature	Financial accounting is based on measurement.	Management accounting is based on judgment.
e) Accuracy	Accuracy is an important factor in financial accounting.	Approximations are widely used in management accounting.

Also Read Management Accounting Solved Papers Gauhati University
Management Accounting Solved Papers' 2012
Management Accounting Solved Papers' 2013
Management Accounting Solved Papers' 2014
Management Accounting Solved Papers' 2015
Management Accounting Solved Papers' 2016
Management Accounting Solved Papers' 2017
Management Accounting Solved Papers' 2018
Management Accounting Solved Papers' 2019
Management Accounting Solved Papers' 2021
Management Accounting Solved Papers' 2023

b) Cost-volume Profit Analysis.

Ans: Cost-Volume-Profit Analysis: Cost-Volume-Profit analysis is analysis of three variables i.e., cost, volume and profit which explores the relationship existing amongst costs, revenue, activity levels and the resulting profit. It aims at measuring variations of profits and costs with volume, which is significant for business profit planning.

CVP analysis makes use of principles of marginal costing. It is an important tool of planning for making short term decisions. The following are the basic decision making indicators in Marginal Costing:

(a) Profit Volume Ratio (PV Ratio) / Contribution Margin ratio

(b) Break Even Point (BEP)

(d) Indifference Point or Cost Break Even Point

(e) Shut-down Point

Assumptions in CVP analysis

The assumptions in CVP analysis are the same as that under marginal costing.

a) Cost can be classified into fixed and variable components.

b) Total fixed cost remain constant at all levels of output

c) The variable cost change in direct proportion with the volume of output

d) The product mix remains constant

e) The selling price per unit remains the same at all the levels of sales

c) Objectives of Budgetary Control.

Ans: Objectives of Budgetary Control: The following are the objectives of a budgetary control system:

a) Planning: A budget provides a detailed plan of action for a business over definite period of time. Detailed plans relating to production, sales, raw material requirements, labour needs, advertising and sales promotion performance, research and development activities, capital additions etc., are drawn up. By planning many problems are anticipated long before they arise and solutions can be sought through careful study. Thus most business emergencies can be avoided by planning. In brief, budgeting forces the management to think ahead, to anticipate and prepare for the anticipated conditions.

b) Co-ordination: Budgeting aids managers in co-coordinating their efforts so that objectives of the organisation as a whole harmonise with the objectives of its divisions. Effective planning and organisation contributes a lot in achieving coordination. There should be coordination in the budgets of various departments. For example, the budget of sales should be in coordination with the budget of production. Similarly, production budget should be prepared in co-ordination with the purchase budget, and so on.

c) Communication: A budget is a communication device. The approved budget copies are distributed to all management personnel who provide not only adequate understanding and knowledge of the programmes and policies to be followed but also gives knowledge about the restrictions to be adhered to. It is not the budget itself that facilitates communication, but the vital information is communicated in the act of preparing budgets and participation of all responsible individuals in this act.

d) Motivation: A budget is a useful device for motivating managers to perform in line with the company objectives. If individuals have actively participated in the preparation of budgets, it act as a strong motivating force to achieve the targets.

e) Control: Control is necessary to ensure that plans and objectives as laid down in the budgets are being achieved. Control, as applied to budgeting, is a systematized effort to keep the management informed of whether planned performance is being achieved or not. For this purpose, a comparison is made between plans and actual performance. The difference between the two is reported to the management for taking corrective action.

d) Distinction between Standard Costing and Budgetary Control.

Ans: Budgetary Control and Standard Costing

Both standard costing and budgetary control achieve the same objective of maximum efficiency and cost reduction by establishing predetermined standards, comparing actual performance with the predetermined standards and taking corrective measures, where necessary. Thus, although both are useful tools to the management in controlling costs, they differ in the following respects:

Budgetary Control	Standard Costing
Budgetary control deals with the operations of a department of business as a whole.	Standard costing is applied to manufacturing of a product, process or processes or providing a service.
It is extensive in its application, as it deals with the operation of department or business as a Whole.	It is intensive, as it is applied to manufacturing of a product or providing a service.
Budgets are prepared for sales, production, cash etc.	It is determined by classifying recording and allocating expenses to cost unit.
It is a part of financial account, a projection of all financial accounts.	It is a part of cost account, a projection of all cost accounts.
Control is exercised by taking into account budgets and actual. Variances are not revealed through accounts.	Variances are revealed through difference accounts.

e) Components of Labour Cost Variance.

f) Use of Accounting Information for Management Purpose.

Ans: Use of accounting information for managerial purpose:

1. Providing Accounting Information. Management accounting is based on accounting information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decisions. Management accounting involves the presentation of information in a way it suits managerial needs.

2. Cause and Effect Analysis. Financial accounting is limited to the preparation of profit and loss account and finding out the ultimate result, i.e., profit or loss Management accounting goes a step further. The ‘cause and effect’ relationship is discussed in management accounting. If there is a loss, the reasons for the loss are probed. If there is a profit, the factors directly influencing the profitability are also studies. So the study of cause and effect relationship is possible in management accounting.

3. Use of Special Techniques and Concepts. Management accounting uses special techniques and concepts to make accounting date more useful. The techniques usually used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. The type of technique to be used will be determined according to the situation and necessity.

4. Taking Important Decisions. Management accounting helps in taking various important decisions. It supplies necessary information to the management which may base its decisions on it. The historical date is studies to see its possible impact on future decisions. The implications of various alternative decisions are also taken into account while taking important decisions.

5. Achieving of Objectives. In management accounting, the accounting information is used in such a way that it helps in achieving organisational objectives. Historical date is used for formulating plans and setting up objectives. The recording of actual performance and comparing it with targeted figures will give an idea to the management about the performance of various departments. In case there are deviations between the standards set and actual performance of various departments corrective measures can be taken at once. All this is possible with the help of budgetary control and standard costing.

3. Describe the tools and techniques of management accounting needed for managerial decisions. 10

Ans: Tools and Techniques Used in Management Accounting

Management accountant supplies information to the management so that latter may be able to discharge all its functions, i.e., planning organization, staffing, direction and control sincerely and faithfully. For doing this, the management accountant uses the following tools and techniques.

a) Financial planning: Financial planning is the act of deciding in advance about the financial activities necessary for the concern to achieve its primary objectives. It includes determining both long term and short term financial objectives of the enterprise, formulating financial policies and developing the financial procedure to achieve the objectives. The role of financial policies cannot be emphasized to achieve the maximum return on the capital employed. Financial policies may relate to the determination of the amount of capital required, sources of funds, govern the determination and distribution of income, act as a guide in the use of debt and equity capital and determination of the optimum level of investment in various assets.

b) Analysis of financial statements: The analysis is an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities and profitability of a sound dividend policy. The techniques of such analysis are comparative financial statements, trend analysis, funds flow statement and ratio analysis. This analysis results in the presentation of information which will help the business executive, investors and creditors.

c) Historical cost accounting: The historical cost accounting provides past data to the management relating to the cost of each job, process and department so that comparison may be made with the standard costs. Such comparison may be helpful to the management for cost control and for future planning.

d) Standard costing: Standard costing is the establishment of standard costs under most efficient operating conditions, comparison of actual with the standard, calculation and analysis of variance, in order to know the reasons and to pinpoint the responsibility and to take remedial action so that adverse things may not happen again. This aspect is necessary to have cost control.

e) Budgetary control: The management accountant uses the total of budgetary control for planning and control of the various activities of the business. Budgetary control is an important technique of directing business operations in a desired direction, i.e. achieve a satisfactory return on investment.

f) Marginal costing: The management accountant uses the technique of marginal costing, differential costing and break even analysis for cost control, decision-making and profit maximization.

g) Funds flow statement: The management accountant uses the technique of funds flow statement in order to analyze the changes in the financial position of a business enterprise between two dates. It tells wherefrom the funds are coming in the business and how these are being used in the business. It helps a lot in financial analysis and control, future guidance and comparative studies.

h) Cash flow statement: A funds flow statement based on increase or decrease in working capital is very useful in long-range financial planning. It is quite possible that these may be sufficient working capital as revealed by the funds flow statement and still the company may be unable to meet its current liabilities as and when they fall due. It may be due to an accumulation of investments and an increase in trade debtors. In such a situation, a cash flow statement is more useful because it gives detailed information of cash inflow and outflow. Cash flow statement is an important tool of cash control because it summarizes sources of cash inflow and uses of cash outflows of a firm during a particular period of time, say a month or a year. It is very useful tool for liquidity analysis of the enterprise.

i) Decision making: Whenever there are different alternatives of doing a particular work, it becomes necessary to select the best out of all alternatives. This requires decision on the part of the management. The management accounting helps the management through the techniques of marginal costing, capital budgeting, differential costing to select the best alternative which will maximize the profits of the business.

j) Revaluation accounting: The management accountant through this technique assures the maintenance and preservation of the capital of the enterprise. It brings into account the impact of changes in the prices on the preparation of the financial statements.

k) Statistical and graphical techniques: The management accountant uses various statistical and graphical techniques in order to make the information more meaningful and presentation of the same in such form so that it may help the management in decision-making. The techniques used are Master Chart, Chart of sales and Earnings, Investment chart, Linear Programming, Statistical Quality control, etc.

l) Communication (or Reporting): The success for failure of the management is dependent on the fact, whether requisite information is provided to the management in right form at the right time so as to enable them to carry out the functions of planning controlling and decision-making effectively. The management accountant will prepare the necessary reports for providing information to the different levels of management by proper selection of data to be presented, organization of data and selecting the appropriate method of reporting.

“Management accounting is concerned with information which is useful to management.” Explain the above statement highlighting the nature of information referred to.

Ans: The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in the creation of policy and in the day-to-day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information.

In the words of R.N. Anthony “Management accounting is concerned with accounting information that is useful to management”.

Anglo American Council of Productivity defines management accounting as “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking”.

According to T.G. Rose “Management accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management”.

From the above explanations, it is clear that management accounting is that form of accounting which enables a business to be conducted more efficiently.

Characteristics or Nature of management accounting

The task of management accounting involves furnishing of accounting data to the management for basing its decisions on it. It also helps, in improving efficiency and achieving organisational goals. The following are the main characteristics of management accounting:

6. No Fixed Norms Followed. In financial accounting certain rules are followed for preparing different accounting books. On the other hand, no specific rules are followed in management accounting. Though the tools of management accounting are the same but their use differs from concern to concern. The analysis of data depends upon the person using it. The deriving of conclusion also depends upon the intelligence of the management accountant. Every concern uses the figures in its own way. The presentation of figures will be in the way which suits the concern most. So every concern has its own rules and by – rules for analyzing the data.

7. Increase in Efficiency. The purpose of using accounting information is to increase efficiency of the concern. The efficiency can be achieved by setting up goals for each department or section. The performance appraisal will enable the management to pin point efficient and inefficient spots. An effort is make the staff cost – conscious. Everyone will try to control cost on one’s own part.

8. Supplies Information and not Decision. The management accountant supplies information to the management. The decisions are to be taken by the top management. The information is classified in the manner in which it is required by the management. Management accountant is only to guide and not to supply decisions. The data is to be used by management for taking various decisions. ‘How is the data to be utilized’ will depend upon the caliber and efficiency of the management.

9. Concerned with Forecasting. The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action. The information is supplied with the object to guide management for taking future decisions.

From the above discussion we can say that Management Accounting is mainly concerned with presentation of accounting information is such a way that is useful to management in decision making.

4. The information in respect of sales and profit of a concern are given below:

Year

Sales (Rs.)

Profit (Rs.)

2014

2015

1,00,000

1,20,000

15,000

23,000

You are required to calculate the following:

1) P/V ratio

2) Fixed cost.

3) Break-even point.

4) Profit when sales are Rs. 1,25,000

5) Sales required to earn a profit of Rs. 20,000

Describe the managerial application of marginal costing techniques in various decision-making areas. 10

Ans: “Marginal Costing” is a valuable aid to Management

Marginal costing and Beak even analysis are very useful to management. The important uses of marginal costing and Break Even analysis are the following:

1) Cost control: Marginal costing divides total cost into fixed and variable cost. Fixed Cost can be controlled by the Top management to a limited extent and Variable costs can be controlled by the lower level of management. Marginal costing by concentrating all efforts on the variable costs can control total cost.

2) Profit Planning: It helps in short-term profit planning by making a study of relationship between cost, volume and Profits, both in terms of quantity and graphs. An analysis of contribution made by each product provides a basis for profit-planning in an organisation with wide range of products.

3) Fixation of selling price: Generally prices are determined by demand and supply of products and services. But under special market conditions marginal costing is helpful in deciding the prices at which management should sell. When marginal cost is applied to fixation of selling price, it should be remembered that the price cannot be less than marginal cost. But under the following situation, a company shall sell its products below the marginal cost:

Ø To maintain production and to keep employees occupied during a trade depression.

Ø To prevent loss of future orders.

Ø To dispose of perishable goods.

Ø To eliminate competition of weaker rivals.

Ø To introduce a new product.

Ø To help in selling a co-joined product which is making substantial profit?

Ø To explore foreign market

4) Make or Buy: Marginal costing helps the management in deciding whether to make a component part within the factory or to buy it from an outside supplier. Here, the decision is taken by comparing the marginal cost of producing the component part with the price quoted by the supplier. If the marginal cost is below the supplier’s price, it is profitable to produce the component within the factory. Whereas if the supplier’s price is less than the marginal cost of producing the component, then it is profitable to buy the component from outside.

5) Closing down of a department or discontinuing a product: The firm that has several departments or products may be faced with this situation, where one department or product shows a net loss. Should this product or department be eliminated? In marginal costing, so far as a department or product is giving a positive contribution then that department or product shall not be discontinued. If that department or product is discontinued the overall profit is decreased.

6) Selection of a Product/ sales mix: The marginal costing technique is useful for deciding the optimum product/sales mix. The product which shows higher P/V ratio is more profitable. Therefore, the company should produce maximum units of that product which shows the highest P/V ratio so as to maximize profits.

7) Evaluation of Performance: The different products and divisions have different profit earning potentialities. The Performance of each product and division can be brought out by means of Marginal cost analysis, and improvement can be made where necessary.

8) Limiting Factor: When a limiting factor restricts the output, a contribution analysis based on the limiting factor can help maximizing profit. For example, if machine availability is the limiting factor, then machine hour utilisation by each product shall be ascertained and contribution shall be expressed as so many rupees per machine hour utilized. Then, emphasis is given on the product which gives highest contribution.

9) Helpful in taking Key Managerial Decisions: In addition to above, the following are the important areas where managerial problems are simplified by the use of marginal costing :

Ø Analysis of Effect of change in Price.

Ø Maintaining a desired level of profit.

Ø Alternative methods of production.

Ø Diversification of products.

Ø Alternative course of action etc.

5. X Ltd. uses standard costing and furnished the following information:

Standard material for 700 units of finished product

Standard price of material

Actual output produced

Opening stock of material

Purchased 3,00,000 kg of material for

Closing stock of material

1000 kg

Rs. 1 per kg

2,10,000 units

22,000 kg

Rs. 2,70,000

17,000 kg

Calculate the following:

a) Direct material cost variance.

b) Direct material price variance.

c) Direct material usage variance.

Give the significance of the above variances. 10

State the meaning of standard costing. Explain the steps of setting standard cost. 3+7=10

Ans: Standard Costing: Standard Costing is defined by I.C.M.A. Terminology as, “The preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence”. Standard costing is a method of ascertaining the costs whereby statistics are prepared to show:

(a) The standard cost

(b) The actual cost

(c) The difference between these costs, which is termed the variance” says Wheldon. Thus the technique of standard cost study comprises of:

Ø Pre-determination of standard costs;

Ø Use of standard costs;

Ø Comparison of actual cost with the standard costs;

Ø Find out and analyse reasons for variances;

Ø Reporting to management for proper action to maximize efficiency.

Introduction of Standard Costing System in an Establishment

Introducing standard costing in any establishment requires the fulfillment of following preliminaries:

a) Establishment of cost centers: A cost centre is a location, person or item of equipment for which costs may be ascertained and used for the purpose of cost control. The cost centers divide an entire organisation into convenient parts for costing purpose. The nature of production and operations, the organisational structure, etc. influence the process of establishing cost centres. No hard and fast rule can be laid down in this regard. Establishment of the cost centres is essential for pin pointing responsibility for variances.

b) Classification and codification of accounts: The need for quick collection and analysis of cost information necessitates classification and codification. Accounts are to be classified according to different items of expenses under suitable headings. Each of the headings is to be given a separate code number. The codes and symbols used in the process facilitate introduction of computerization.

c) Determining the types of standards and their basis: Standards can be classified into two broad categories on the basis of the length of use:

i. Current standards: These are standards which are related to current conditions, particularly of the budget period. They are for short-term use and are more suitable for control purpose. They are also more amenable for combining with budgeting.

ii. Basic standards: These are long-term standards; some of them intended to be in use for even decades. They are helpful for planning long-term operations and growth. There can be significant difference in the standards set depending on the base used for them. The following are the different bases for setting standard, whether they are current standards for short-term or basic standards for long-term use.

Ø Ideal standards: These standards reflect the best performance in every aspect. They are like 100 marks in a paper for students taking up examinations. What is possible under ideal circumstances in all aspects is reflected in these standards. They are impractical and unattainable in practice. There utility for control purpose is negligible.

Ø Past performance based standards: The actual performance attained in the past may be taken as basis and the same may be retained as standard. Such standards do not provide any incentive or challenge to the employees. They are too easy to attain. Their value from cost control point of view is minimal.

Ø Normal standard: It is defined as “the average standard which, it is anticipated can be attained over a future period of time, preferably long enough to cover one trade cycle”. They are average standard reflecting the average performance over a complete trade cycle which may take three to five years. For a specific period, say a budget period, their relevance is negligible.

Ø Attainable high performance standards: They are based on what can be achieved with reasonable hard work and efforts. They are based on the current conditions and capability of the workers. These standards are considered to be of great practical value because they provide sufficient incentive and challenge to the workers to attain them. Any variances from such standard are really significant because the standard which is attainable with effort is not attained.

d) Determining the expected level of activity: Capacity of operation or level of activity expected over a future period is vital in fixing current or short-term standards. When the activity level is decided on the basis of sales or production, whichever is the limiting factor; all standard can be developed with the activity level as the focal point. The purchase of material, usage of material, labour hours to be worked, etc. are solely governed by the planned level of activity.

e) Setting standards: Standards may be either too strict or too liberal because they may be based on theoretical maximum efficiency attainable good performance or average past performance. Setting standards may also be called developing standards or establishment of standard cost because as a consequence of setting standards for various aspects, standard cost can be computed.

6. The expenses for production of 6,000 units and 8,000 units at 60% and 80% capacity respectively in a factory are given below:

	Expenses (in Rs.)
	6,000 units	8,000 units
Material Labour Direct Expenses Factory overhead Administrative overhead Selling expenses	4,20,000 1,50,000 30,000 2,20,000 50,000 83,200	5,60,000 2,00,000 40,000 2,60,000 50,000 1,06,600
	9,53,200	12,16,600

Administrative overhead, fixed factory overhead and fixed selling expenses are rigid at any level of activity upto 100% capacity. Prepare a Flexible Budget for production of 10,000 units at 100% capacity. [Show proper working notes] 10

State the advantages and limitations of budgetary control in a business. 5+5=10

Ans: Advantages of Budgetary Control:

A budget is a blue print of a plan expressed in quantitative terms. Budgeting is technique for formulating budgets. Budgetary Control, on the other hand, refers to the principles, procedures and practices of achieving given objectives through budgets. Here are the some Advantages of Budgetary Control:

a) Maximization of Profit: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and co-ordination of different functions is undertaken. There is proper control over various capital and revenue expenditures. The resources are put to the best possible use.

b) Efficiency: It enables the management to conduct its business activities in an efficient manner. Effective utilization of scarce resources, i.e. men, material, machinery, methods and money - is made possible.

c) Specific Aims: The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving come specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.

d) Performance evaluation: It provides a yardstick for measuring and evaluating the performance of individuals and their departments.

e) Economy: The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.

f) Standard Costing and Variance analysis: It creates suitable conditions for the implementation of standard costing system in a business organization. It reveals the deviations to management from the budgeted figures after making a comparison with actual figures.

Limitations of Budgetary Control System:

The list of advantages given above is impressive, but a budget is not a cure all for organisational ills. Budgetary control system suffers from certain limitations and those using the system should be fully aware of them.

a) The budget plan is based on estimates: Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is not possible in forecasting and budgeting. The strength or weakness of the budgetary control system depends to a large extent, on the accuracy with which estimates are made. Thus, while using the system, the fact that budget is based on estimates must be kept in view.

b) Danger of rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may affect day-to-day operations and ignores the dynamic state of organization functioning.

c) Budgeting is only a tool of management: Budgeting cannot take the place of management but is only a tool of management. ‘The budget should be regarded not as a master, but as a servant.’ Sometimes it is believed that introduction of a budget programme alone is sufficient to ensure its success. Execution of a budget will not occur automatically. It is necessary that the entire organisation must participate enthusiastically in the programme for the realisation of the budgetary goals.

d) False Sense of Security: Mere budgeting cannot lead to profitability. Budgets cannot be executed automatically. It may create a false sense of security that everything has been taken care of in the budgets.

e) Lack of coordination: Staff co-operation is usually not available during budgetary control exercise.

f) Expensive Technique: The installation and operation of a budgetary control system is a costly affair as it requires the employment of specialized staff and involves other expenditure which small concerns may find difficult to incur. However, it is essential that the cost of introducing and operating a budgetary control system should not exceed the benefits derived there from.

***

Management Accounting Solved Question Papers 2016 [Gauhati University Solved Papers BCOM 5th SEM]